26 January 2016

New estimates make the problem sound insoluble

By Alicia H. Munnell

Social Security may be at risk after the November elections. Critics are writing op-eds saying that benefits – relative to previous earnings – are very high, and the Congressional Budget Office (CBO) has come out with an astounding estimate of the 75-year deficit. The stage is being set for benefit reductions. Cutting benefits would be a huge mistake, given that half the private sector workforce does not participate in an employer-sponsored retirement plan and that those lucky enough to participate in a 401(k) have combined 401(k)/IRA balances of $111,000 as they approach retirement. Therefore, it is very important to take a hard look at the emerging characterization of the Social Security program. This blog focuses on the 75-year deficit.

The 75-year deficit is the difference between the income rate and the cost rate. The income rate is calculated by adding the current trust fund balance to the present discounted value of scheduled taxes and then dividing by the present discounted value of taxable payroll over the 75-year period. The cost rate is the present discounted value of scheduled benefits divided by the same payroll number. In 2015, the Social Security Trustees Report had an estimated deficit equal to 2.68 percent of taxable payroll. That figure means that if payroll taxes were raised immediately by 2.68 percentage points – 1.34 percentage points each for the employee and the employer – the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2089.